Baidu, Inc. (BIDU) Q3 2020 Earnings Name Transcript

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Baidu, Inc. (NASDAQ:BIDU)
Q3 2020 Earnings Name
Nov 17, 2020, 10:15 p.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Contributors

Ready Remarks:

Operator

Hey, and thanks for standing by for Baidu’s Third Quarter 2020 Earnings Convention Name. At the moment, all individuals are in listen-only mode. After administration’s ready remarks, there might be a question-and-answer session. Right this moment’s convention is being recorded. If in case you have any objections, you could disconnect at the moment.

I might now like to show the assembly over to your host for at this time’s convention, Juan Lin, Baidu’s Director of Investor Relations.

Juan LinHead of Investor Relations

Hey, everybody, and welcome to Baidu’s third quarter 2020 earnings convention name. Baidu’s earnings launch was distributed earlier at this time and yow will discover a duplicate on our web site in addition to on newswire companies.

On the decision at this time, now we have Robin Li, our Chief Government Officer; Herman Yu, our Chief Monetary Officer; and Dou Shen, our Government Vice President in-charge of Baidu’s Cell Ecosystem Group, our search and feed enterprise. After our ready remarks, we’ll maintain a Q&A session.

Please be aware that the dialogue at this time will include forward-looking statements made beneath the Protected Harbor Provisions of the US Non-public Securities Litigation Reform Act of 1995. Ahead-looking statements are topic to dangers and uncertainties which will trigger precise outcomes to vary materially from our present expectations. Potential dangers and uncertainties embrace, however aren’t restricted to these outlined in our public filings with the SEC, together with our Annual Report on Type 20-F. Baidu doesn’t undertake any obligation to replace any forward-looking statements, besides as required beneath relevant regulation.

Our earnings press launch and this name embrace discussions of sure unaudited non-GAAP monetary measures. We’ve got made minor changes to our non-GAAP measures and — which actively apply these modifications for comparability functions. Our press launch incorporates a reconciliation of the unaudited non-GAAP measures to the unaudited most instantly comparable GAAP measures and is accessible on our IR web site at ir.baidu.com.

As a reminder, convention is being recorded. As well as, a webcast of this convention name may also be obtainable on Baidu’s IR web site.

I’ll now flip the decision over to our CEO, Robin.

Robin LiCo-Founder, Chairman and Chief Government Officer

Hey, everybody. We delivered strong leads to the third quarter with Baidu’s complete revenues reaching RMB28.2 billion, up 1% from final yr. Baidu Core income reached RMB21.Four billion, up 13% sequentially, which is an acceleration from the 8% sequential progress for the third quarter final yr.

China noticed a second wave of COVID-19 instances in July and was fast to include the pandemic, giving us confidence that China has customary working procedures in place to promptly take care of the brand new COVID outbreaks. Lots of the promoting verticals that noticed unfavorable progress in prior quarters have rotated, together with healthcare, training, auto, life-style and software program. Because the Chinese language financial system continues to get better, we’re in place to additional profit from such enchancment within the bins [Phonetic] atmosphere.

Over the previous couple of years, now we have centered on strengthening Baidu’s cell ecosystem by growing log-in customers, aggregating content material and companies on Baidu’s platform and including social engagement to our platform. Such strengthening of our cell ecosystem has not solely improved the search consumer expertise, it has additionally allowed customers to do extra on Baidu, from data analysis to social interplay to closed-loop purchases. In September, MAUs on Baidu App reached 544 million, up 12% year-over-year. In-app search queries proceed to develop in teenagers and every day customers logged in on Baidu App reached 70%. That is up from 53% a yr in the past.

A striving [Phonetic] cell ecosystem units a powerful basis for Baidu to diversify past promoting into non-advertising companies, equivalent to membership and on-line video games. Reside streaming can also be proving to be feed for Baidu customers. Non-advertising client system income for Baidu Core reached RMB1.Four billion or $211 million, that is up 2.6% — 2.6 instances from two years in the past and paid membership reached 31.5 million within the third quarter. To speed up our efforts in rising non-advertising companies, we introduced at this time our intention to accumulate YY Reside, a number one video-based reside streaming platform in China. Including YY Reside to our portfolio will permit Baidu to achieve rapid operational expertise and know-how on constructing a big reside video neighborhood. We’re excited in regards to the alternatives forward by merging Baidu’s giant visitors and vibrant cell ecosystem with YY’s experience in video programming, creator community administration and social media neighborhood improvement. Along with YY’s staff, we hope to discover the following era of reside video and enterprise past leisure into each side of our lives within the years to come back.

Our on-line advertising companies. We’ve got added reside streaming and buy capabilities to our platforms and are enabling customers to seamlessly transfer from data, to social, to buy on our platform, inside consumer search and comply with related data, work together with retailers and seamlessly full a purchase order of third-party items and companies on Baidu. By offering a platform from data to social to buy, we’re enlarging the TAM for our on-line belongings, from curiosity era to buy conversion to loyalty advertising and promoting, which permit retailers to carry out consumer lifetime worth administration. Baidu’s in-app income, which accounts for greater than half of our cell ecosystem income continues to expertise double-digit progress with additional upside from non-advertising income. Baidu’s new AI companies are additionally experiencing double-digit progress with Baidu Cloud rising 41% year-over-year within the third quarter.

Let’s start Q3’s dialogue with our cell ecosystem. In September, Baidu App DAU reached 206 million, up 9% year-over-year. Let me go over our progress in video verticals and communities and monetization. First, on video. As a number one Web platform for content material and companies, Baidu is attracting an amazing quantity of creators to supply data and information-centric reside video and quick movies. For instance, the variety of topical sections equivalent to Surprise Planet and Who To Help reside streamed within the third quarter was up eight=fold from the prior quarter.

And second, on vertical and communities. By way of our AI constructing blocks and industry-specific choices, we’re seeing verticals creating efficiently on Baidu. As an illustration, within the B2B sector, we added enhanced commerce capabilities to our hosted advertising cloud platform, equivalent to verified service provider data and a big catalog of SKUs to type a B2B market that we name [Indecipherable]. Our B2B neighborhood permits Baidu clients who previously solely bought by means of visitors, to now raise their industrial machineries interactive with potential shoppers and eat it with the transaction on our platform. The income recognition of our B2B market on our advertising cloud platform has resulted in paid service provider membership surpassing 100,000 within the third quarter.

Baidu Well being proceed to solidify its market place as a high healthcare platform in China. Baidu’s improvement of high-quality content material and communities is exploring tele-health with on-line physician session growing 60% from a yr in the past. Healthcare-related GMV within the third quarter was up 26-fold from final yr. Sooner or later, Baidu Well being has the potential to supply prescribed drugs and healthcare merchandise, leveraging our dominant visitors in offering healthcare-related data and the massive scale of social engagements creating on our platform.

On the establishment aspect, our partnership with over 80 high hospitals nationwide places us in place to allow the digital transformation of hospitals and assist them keep linked with sufferers. This, in flip will make it extra handy for customers to entry hospital companies and their very own well being data.

Third, on monetization. Beginning with advertising companies. Baidu App proceed to show energy, with in-app promoting income rising double digits year-on-year, pushed by sturdy in-app search visitors, coupled with in-app search CPM [Phonetic] progress, additional validating the worth of Baidu’s open platform in-app search technique.

Income from Managed Web page reached 32% of Baidu Core’s on-line advertising income within the third quarter as extra website homeowners study the advantage of combining Baidu’s visitors with our hosted advertising cloud platform. A number one Chinese language EV producer switched to Managed Web page, and when mixed with Baidu’s monetization merchandise, noticed its advertising ROI improved considerably. Leads elevated by 80% and price per lead dropped 40% from a yr in the past. With extra customers viewing movies on Baidu, wealthy media advertisements are starting to see traction. In September, income generated from video advertisements on cell search outcomes grew 83% from three months prior. Video advertisements are appropriate for advertisers throughout many industries, together with healthcare, native companies, monetary companies, software program and equipment. And with continued adoption, video advertisements are usually one other driver of CPM progress sooner or later.

Along with rising Baidu advert income, now we have substantial upside from rising non-advertising income. In response to [Indecipherable], Baidu is among the three Web corporations in China which have a attain of over 1 billion Web gadgets per thirty days. Non-advertising income, as a proportion of our complete consumer-facing enterprise is far decrease than our friends. As we additional develop our cell ecosystem to allow data, social and buy, we have a tendency to profit from the numerous alternatives that may come up from a deeper reference to our customers.

Shifting to cloud and AI companies. Baidu Cloud is offering a one-stop store for cloud computing and differentiating with AI options to allow clever industries. For instance, Baidu has partnered with Postal Financial savings Financial institution of China, a high retail financial institution in China with 40,000 branches to supply Baidu AI PaaS to assist enhance credit score threat administration with Baidu’s AI capabilities. Utilizing AI to enhance threat administration for mortgage provision is especially significant as Publish Financial savings has one of many largest client base of people and small enterprises in China.

Baidu can also be partnering with financial and technological improvement [Indecipherable], a major information middle hub in China to supply AI duties. This strategic partnership will permit the 400-plus corporations based mostly within the financial improvement zone entry to Baidu’s AI PaaS and leverage our main AI capabilities, equivalent to deep studying, blockchain and automatic information recognition to make manufacturing enchancment and effectivity positive factors. The 400-plus corporations span throughout many industries, together with manufacturing, electronics, auto, healthcare and pharmaceutical industries.

Baidu’s cloud infrastructure is differentiated by a complete end-to-end stack, from AI chips to open platform to deep studying framework to PaaS and SaaS options. A key part of Baidu’s AI is our giant open-platform developer neighborhood. By opening up Baidu’s AI to the world, we realized how AI is used and enlist builders to assist Baidu enhance our AI fashions, which in flip helps Baidu develop distinctive AI options. Baidu’s AI open-platform provides over 270 AI capabilities which is tapped 1 trillion instances per day at peak by a developer neighborhood of over 2 million.

Turning to Apollo. In August, Apollo gained an RMB460 million mission to assist Guangzhou enhance visitors effectivity, security and air air pollution by adopting Baidu’s V2X answer, which helps autonomous driving and different capabilities. This can be the biggest good transportation mission but in China, which displays the general public sector’s willingness to make use of know-how to enhance the well-being of metropolis life. Baidu has just lately opened a Apollo robotaxi companies to the general public in Beijing, the third metropolis following the operations in Changsha and Hangzhou. Passengers might name a robotaxi from Baidu Maps or Apollo Go App.

And on DuerOS. In response to market analysis agency, IDC, Technique Analytics and Canalys, Xiaodu Good Show was ranked primary in shipments globally, and Xiaodu Good audio system was ranked primary in shipments in China for the second quarter of 2020. In September, we launched the Xiaodu Good earphones, which permit customers to go looking, make calls and navigate DuerOS expertise by means of a voice assistant in addition to your on the spot language translation. Preliminary suggestions on Xiaodu Good Earphones with — retails for roughly $35 a pair has been fairly optimistic.

With that, let me flip the decision over to Herman to undergo our monetary highlights.

Herman YuChief Monetary Officer

Thanks, Robin. Hey, everybody. Welcome to Baidu’s third quarter 2020 name. All financial quantities utilized in my dialogue are in renminbi, until acknowledged in any other case.

Baidu’s complete revenues reached RMB28.2 billion or $4.2 billion, growing 1% year-over-year, rebounding from the trough in Q1. Our enterprise enchancment primarily got here from Baidu Core, whose income reached RMB21.Four billion or $3.1 billion within the third quarter, up 2% year-over-year versus down 13% within the first quarter and down 3% within the second quarter. IT income reached RMB7.2 billion, down 3% year-over-year. IT membership income was up 7%, offset by an 11% decline in IT promoting income. IT promoting didn’t carry out as robustly as we had hoped, however on a sequential foundation, IT promoting regularly is recovering, up 16% quarter-over-quarter.

Non-GAAP value of revenues was RMB12.7 billion, down 22% year-over-year, primarily as a consequence of a lower in content material prices, visitors acquisition prices and price of products bought. Non-GAAP SG&A bills had been RMB4.Three billion, down 1% year-over-year. Non-GAAP R&D bills had been RMB3.6 billion, down 6% year-over-year, and non-GAAP working revenue for Baidu was RMB7.6 billion, up 107% year-over-year. Non-GAAP working revenue for Baidu Core was RMB8.5 billion or $1.Three billion, up 37% year-over-year. Non-GAAP working margin for Baidu Core was 40%, up 10 factors from final yr.

Complete different revenue within the quarter was RMB8.Three billion or $1.Three billion, which features a honest worth acquire of RMB9 billion from long-term investments. Adjusted EBITDA was RMB9.1 billion, up 77% year-over-year. Adjusted EBITDA for Baidu Core was RMB9.Eight billion or $1.Four billion, up 31% year-over-year and adjusted EBITDA margin for Baidu Core was 46%, additionally up 10 factors from final yr.

As of September 30th, our money and short-term investments had been RMB146 billion, and money and short-term investments for Baidu Core was RMB138.5 billion or $20.Four billion. Free money movement within the third quarter was RMB6.Three billion, and free money movement, excluding IT, was RMB8.Three billion or $1.2 billion.

In the course of the third quarter, we returned roughly $600 million to our shareholders, bringing the cumulative repurchase for this yr — year-to-date to roughly $1.Three billion. Baidu Core had roughly 31,300 full-time workers as of September 30th, up 3% from final yr.

Let me offer you extra colour on the initiatives of Baidu Core. We beforehand mentioned Baidu’s Core’s enterprise in two components; cell ecosystem and new AI initiatives. On at this time’s name, I’ll present additional data on our new AI initiatives to offer you a greater understanding of our progress and make it easier to higher worth our enterprise.

Our new AI initiatives encompass two components; AI cloud and autonomous driving plus different progress initiatives which we’ll name AD plus OGI. Let me briefly clarify every a part of our core enterprise. First, cell ecosystem. In-app promoting is a rising majority of our promoting enterprise. In our legacy enterprise, union plus PC promoting is a small half. Cell ecosystem additionally contains non-advertising companies equivalent to reside streaming and on-line video games.

Second, AI cloud. Our cloud providing serves enterprises to public sector and shoppers. Whereas our AI cloud workplace cloud computing equivalent to CDN and App, which is the area most of our friends are taking part in in, our AI cloud is a one-stop store with differentiating emphasis on offering AI options, equivalent to AI pass-through enterprise clients and V2X platform options to the general public sector.

Lastly, autonomous driving plus different progress initiatives. AD plus OGI contains autonomous driving, DuerOS and different progress initiatives. For readability, Apollo encompasses three monetization fashions; good transportation, IOB or linked automobiles and autonomous driving. For income classification functions, the primary two, although fairly small previously, are included in cloud whereas the final merchandise is included in AD plus OGI.

Let me now offer you extra data on the progress of Baidu Core. On cell ecosystem, a lot of our promoting verticals have rotated within the third quarter, together with healthcare, training, auto, life-style and software program. In-app promoting, which is a rising majority of Baidu’s cell ecosystem income proceed to see wholesome double-digit progress, benefiting from in-app search question and CPM progress.

We introduced earlier that now we have entered into definitive agreements with JOYY to accumulate its reside streaming enterprise in China for an additive buy worth of roughly $3.6 billion payable in money. In 2019 unaudited numbers, YY Reside’s income was roughly RMB10 billion and non-GAAP internet margin was over 30%. We count on to shut this transaction which is topic to sure circumstances within the first half of 2021. With the acquisition of YY Reside, non-advertising will develop into a significant piece of our ecosystem and our legacy enterprise, which has been dragging our cell ecosystem progress will develop into an excellent smaller piece of our enterprise.

AI cloud noticed a strong income progress within the third quarter, reaching RMB2.2 billion, up 41% from final yr, pushed by clients from the Web, transportation, monetary companies and healthcare indices. Baidu Cloud income is seeing accelerated income progress with the Chinese language financial system opening up and our gross sales pressure is ready to make extra website visits to potential clients.

Our AD plus OGI. We entered into definitive agreements to lift financing for DuerOS at a post-money valuation of roughly $2.9 billion in September. Baidu will proceed to be a brilliant majority shareholder at closing and count on the transaction to shut within the fourth quarter. Primarily based on {industry} information, the goal market has valued main autonomous driving corporations between $5.Four billion to $30 billion. We’re reviewing enterprise metrics disclosed by different autonomous driving corporations and we’ll share with them significant information to measure Apollo’s progress. For instance, amassed check miles for Apollo autonomous driving reached 3.5 million miles in September, up 150% year-over-year.

Turning to fourth quarter steerage. We count on complete income to be between RMB28.6 billion and RMB31.Three billion, representing a progress charge of unfavorable 1% to eight% year-over-year. Our steerage assumes Baidu Core will develop between unfavorable 1% and 10% year-over-year. These forecasts are present and preliminary evaluation, which is topic to substantial uncertainty.

Earlier than I flip the decision again to the operator, let me summarize our third quarter achievements. With the Chinese language financial system rebounding, Baidu’s enterprise has seen accelerated sequential progress within the final three quarters. We count on fourth quarter to proceed sooner sequential progress. Our technique to construct an in-app open platform ecosystem powered by search is bearing fruit. Website homeowners are becoming a member of Baidu Managed Web page, and app builders are shifting the content material companies onto Baidu’s Good Mini Program. With extra touchdown pages chosen on be a part of Baidu’s platform, consumer expertise is bettering. Day by day log-in customers are up 17.70%. Open platform in-app companies powered by our advertising cloud platform is serving our retailers higher. Consequently, in-app income continued to develop double digits, pushed by the expansion in in-app search queries and in-app search CPM. Our new AI initiatives are additionally seeing wholesome double-digit progress and we count on even larger contribution subsequent yr.

With COVID-19 beneath management in China, our gross sales pressure is touring extra absolutely round China. We’re using on a wave of clever transformation throughout industries and China is selling the brand new infrastructure initiative to spice up an financial rebound.

Baidu stands to profit from the clever transformation throughout {industry} sectors with our unwavering funding in AI, our 2 million sturdy AI developer neighborhood. Baidu Core’s adjusted EBITDA reached $1.45 billion within the third quarter, up 31% year-over-year, and adjusted EBITDA margin reached a historic excessive of 46%. For the previous 20 years, Baidu has efficiently weathered many financial disaster and market modifications by constructing platforms with main applied sciences. We proceed to construct our future with sturdy enterprise fashions like in-app search with AI constructing block and advertising cloud platform like cloud companies with AI PaaS options, like good transportation with V2X answer and like voice assistant with DuerOS.

Our platform-based enterprise fashions will permit Baidu to higher climate troublesome instances and supply sustainable long-term progress to our shareholders. With the acquisition of YY Reside, we’re catapulted to develop into a frontrunner in reside streaming. The acquisition of YY Reside might be an all money transaction, which is placing the money on Baidu’s stability sheet to good use. We’ve got an excellent alternative to leverage Baidu’s large consumer base to develop reside streaming by means of non-advertising income. Along with buying companies that strengthen our ecosystem and enhance our profitability, now we have used the money on our stability sheet to execute on our share buyback program and constant return money to our shareholders.

In abstract, our enterprise stands to profit from additional restoration within the Chinese language financial system. We now have a possibility to optimize Baidu’s giant visitors and vibrant cell ecosystem with a deal with rising non-advertising income. Enterprise cloud and good transportation are two enormous income alternatives forward of us. Our autonomous driving can also be progressing nicely and our friends are being valued between $5.Four billion and $30 billion.

Operator, with that, let’s now open the decision to questions.

Questions and Solutions:

Operator

Girls and gents, we’ll now start the question-and-answer session. [Operator Instructions] Your first query comes from Alicia Yap from Citigroup. Please ask your query.

Alicia YapCitigroup — Analyst

Hello, thanks. Good morning Robin, Herman, Dou, and Juan. Thanks for taking my questions and in addition congrats on strong outcomes. So my query is said to this rationale behind the acquisitions of YY home reside streaming enterprise. So might you assist us perceive the intention behind? I feel you talked about about increasing into non-advertising enterprise. However I feel given reside streaming enterprise has been extra saturating and maturing, so possibly you might assist us perceive what are the methods or considering behind that Baidu might assist YY to revive the expansion?

After which second is, given reside streaming know-how can also be changing into an increasing number of as promoting instruments, would that develop into an curiosity for Baidu to really spend the advert monetization alternative with reside streaming transcend the commerce with — turns into extra like a advertising method, proper, for lots of the {industry} vertical to construct the branding and in addition drive conversion. So any colour you might share can be appreciated. Thanks.

Robin LiCo-Founder, Chairman and Chief Government Officer

Hello Alicia, that is Robin. Let me handle your questions first. In case you take a look at — as you understand, YY is among the pioneers of reside streaming enterprise. You most likely seen that the early gamers have all matured and have been requested by the bigger cell eco platforms. That demonstrates that reside streaming as an unbiased enterprise is type of robust while you — or scale, it is not giant sufficient. However, for giant platforms like Baidu, now we have an mixture of about 300 million every day lively customers. It is solely pure for us to combine with reside streaming enterprise equivalent to YY and additional monetize our current consumer base and visitors. Like I discussed in the course of the ready remarks, should you take a look at the income stream of Baidu and different comparable cell ecosystem, the promoting income for us represents a a lot bigger proportion than every other cell platforms you’ll be able to consider.

On the opposite aspect, now we have been very centered on offering one of the best advertising options to our clients. However alternatively, we should always actually discover and diversify our — discover new initiatives and diversify our income supply. So YY has a really sizable enterprise when it comes to reside streaming. We’ve got quite a lot of expertise when it comes to working such ecosystem of performers within the so-called large Rs who pay tricks to these reside performers. And with that type of operational expertise and stakeholders within the reside streaming ecosystem, we predict it’s extremely invaluable for the general Baidu ecosystem.

And about reside streaming as a brand new type of media, you kind of talked about that it may be used for different functions, not only for the present enterprise, it may be used for purchases, which is already highly regarded amongst different cell ecosystems. It will also be a really efficient software for on-line advertising. In my thoughts, reside streaming is corresponding to quick video and textual content and picture. It is only a new type of media. We will, and we should always leverage this new type of media to additional improve our cell ecosystem, supplies a greater consumer expertise and supplies higher values for the advertisers and clients of the Baidu ecosystem.

Alicia YapCitigroup — Analyst

Thanks, Robin.

Operator

Your subsequent query comes from Eddie Leung from Financial institution of America Merrill Lynch. Please ask your query.

Eddie LeungFinancial institution of America Merrill Lynch — Analyst

Good morning, guys. Sure. Only a follow-up on Alicia’s query on the rationale behind acquisition of YY. Sure, we perceive that Baidu has fairly some trough, which will help a monetization by YY. However I am simply curious on two issues. One is why aren’t enthusiastic about doing reside broadcasting by your self, simply creating the enterprise organically?

After which secondly, when it comes to timing, I feel Alicia identified level that reside broadcasting will not be a reasonably very new enterprise in China. So why now? Why not earlier? Thanks.

Robin LiCo-Founder, Chairman and Chief Government Officer

Hello. Eddie, simply to make clear, now we have been doing reside streaming collection of Baidu apps, together with Baidu App, Tieba, [Indecipherable]. What now we have seen is that the income from reside streaming have been rising very, in a short time. I mainly talked about that over two years, our non-advertising income grew like 2.6 instances. And should you speak about, for instance, final month, reside streaming income on the Baidu platform grew greater than 80% year-on-year. So that provides us the arrogance that the Baidu ecosystem is definitely very appropriate for reside streaming, when you’ll be able to see the reside streaming as a approach of monetizing your system or consumer base.

And why not earlier? So I advised you, we have been doing this. And why not organically? Principally, such as you stated, it is new. It is not new as a approach of monetizing consumer basic. YY is a pioneer within the area, they’ve amassed quite a lot of operational expertise. As you heard from Herman, it is a sizable enterprise and it is bought excellent margin. So there are quite a lot of issues that we will study they usually have an excellent, very loyal consumer base and customary creator neighborhood that’s arduous for us to get in a really quick time frame. In order that’s why we determined to make this acquisition.

Eddie LeungFinancial institution of America Merrill Lynch — Analyst

Understood. After which only a fast follow-up on Herman’s touch upon cell ecosystem versus the legacy enterprise. So simply questioning should you guys can share a bit extra colour on the expansion tendencies, particularly the variations in progress charges between the cell ecosystem, particularly your app versus the legacy items? Thanks.

Herman YuChief Monetary Officer

Yeah. Hello, Eddie. Yeah. Really, in our ready remarks, we talked about that. When you consider our cell ecosystem, we speak market in-app companies. So what we stated was for in-app companies, in-app promoting, grew double digits this quarter, and we have been in a position to develop double digits for the final three quarters regardless of COVID-19. So leveraging our AI capabilities, our AI constructing blocks and advertising companies platform, we’re in a position to do a lot better.

However, our legacy enterprise, we have been seeing a steady drop. A part of it’s there’s much less visitors to purchase, handsets aren’t promoting as nicely this yr. So you may have much less new telephone and fewer visitors demand. And secondly, for this space, as we talked about many instances, we’re specializing in maximizing revenue slightly than income. That is why you are seeing as we’re pulling again on a few of this visitors, you are seeing our margin really enhance. Primary is specializing in profitability progress slightly than simply absolute income progress. And quantity two, as we swap over — as a proportion of income swap over from legacy enterprise into in-app, we’re in a position to have higher profitability, we do not have to pay for it [Phonetic].

Operator

Your subsequent query comes from Piyush Mubayi from Goldman Sachs. Please ask your query.

Piyush MubayiGoldman Sachs Group, Inc. — Analyst

Thanks for the chance. I’ve three questions. The primary is as regards to the Core enterprise. We’re making an attempt to higher perceive the drivers of the place the enterprise sits at this time. And particularly, on the pricing aspect, the place are we? Wanting on the numbers on a year-on-year foundation, should you might simply take us by means of that dynamic, and if potential, by means of industries, it might be very useful.

The second is on the fee aspect the place your margins proceed to enhance, simply needed to know how a lot of that got here by means of. The change within the accounting estimates of future viewership consumption patterns that we have seen on the iQIYI aspect. And the way a lot of this pattern of constant margin enchancment will be constructed into the way in which we consider the remainder of the yr and doubtlessly 2021.

And the third is congratulations on the RMB460 million win for Apollo. I simply wish to perceive how that is going to get booked. And in addition your perspective on once we can count on Apollo to begin to penetrate the China home manufacturing — vehicle manufacturing base. If that is the way in which we needs to be enthusiastic about it or ought to we be enthusiastic about how Apollo penetrates the transportation community throughout China, the federal government aspect of protection? Thanks very a lot.

Robin LiCo-Founder, Chairman and Chief Government Officer

Okay. Herman will reply the primary two, and I am going to reply the third one.

Herman YuChief Monetary Officer

Yeah. Hello, Piyush. So as regards to pricing, by means of our AI constructing block and thru our advertising companies platform, as we demonstrated particular instances in our name this time previously few quarters, you’ll be able to see really, as advertisers swap over to our Managed Web page, leveraging our AI capabilities and so forth, we’re in a position to really get the CPM to show round. So within the third quarter, we really noticed a optimistic progress on a year-over-year foundation. On a sequential foundation, we’ll proceed to see CPM coming again.

As regards to our margins, I feel Q3 was fairly excessive with our EBITDA margin of 46%. A few of that was non-recurring. So I feel while you go into This autumn, I might simply estimate that you must see our value of gross sales plus working bills rising most likely within the mid-teens on a sequential foundation. A part of it’s as a result of we have been making an attempt to rent this yr and it has been very arduous to interview everybody that we would like with the COVID-19 and so forth. And second is a few of our advertising spend that we have been making an attempt to spend, as I discussed earlier, we do not have quite a lot of new handsets promoting within the early a part of the yr. It’s totally arduous to spend the cash. However we anticipate the financial system coming again and anticipate that we’ll be capable of have an atmosphere the place we will spend extra advertising {dollars}. And hopefully, that will assist our visitors sooner or later quarters.

Robin LiCo-Founder, Chairman and Chief Government Officer

Hello Piyush, on the Apollo query, we will mainly begin to see Apollo as a full stack answer for good transportation or it is a vibrant ecosystem that features lots of the stakeholders when it comes to OEMs, the municipal authorities, the know-how suppliers and different Tier 1 gamers. From a enterprise mannequin viewpoint, Apollo mainly has three instructions. The primary one is know-how supplier for the OEMs. We promote DuerOS for — though we promote autonomous driving applied sciences to the OEMs. And the second is the good transportation infrastructure initiatives. The RMB460 million mission we gained in Guangzhou belongs to this. We basically imagine that by constructing a wise infrastructure for transportation, the Chinese language cities can enhance the effectivity of mobility considerably. And since transportation represents a big proportion of the full home gross manufacturing, it has an enormous worth, not solely from enterprise viewpoint, but additionally from the social viewpoint. Folks might be exempted from the congested visitors.

And the third half is the Stage Four and Stage 5, absolutely self-driving car. Ultimately, this might be monetized simply by means of robotaxi. And like I talked about in the course of the ready remarks, now we have been deploying robotaxi companies in quite a lot of Chinese language cities and we count on the unmanned testing in addition to the industrial deployment someday within the close to future.

Piyush MubayiGoldman Sachs Group, Inc. — Analyst

Thanks.

Operator

Your subsequent query comes from James Lee from Mizuho. Please ask your query.

James LeeMizuho Securities — Analyst

Nice. Thanks for taking my questions. Two questions right here, too. One on autonomous driving. Simply curious, are there any new authorities coverage that’s supporting adoption, possibly among the many OEMs right here? And the way vital is type of OEM partnership that can assist you to realize what you are promoting mannequin right here?

And in addition secondly, a follow-up query on YY particularly. And possibly should you might and clearly you simply made the announcement, be somewhat bit extra particular speaking in regards to the content material technique put up the combination, type of how do you intend to distinguish versus friends and possibly speak in regards to the synergy somewhat bit between Baidu and YY and the way do you intend to combine Baidu’s Core content material into YY? Thanks.

Robin LiCo-Founder, Chairman and Chief Government Officer

[Technical Issues] query. From a authorities’s viewpoint, many native governments actually are enthusiastic about working with us to supply higher infrastructure for this sort of technological innovation. That is why now we have been working with a dozen, greater than dozen cities to all types of good infrastructure, transportation infrastructure initiatives.

And on the OEM aspect, we accomplice with lots of the OEMs. We offer know-how to them and they’ll work with the native authorities to get no matter tax advantages or different investments from this sort of initiative. So from that viewpoint, we interacted beneficiary of the federal government insurance policies.

Herman YuChief Monetary Officer

Yeah. And let me add a couple of issues to what Robin simply stated. So the belief right here is that when you consider autonomous driving within the US, it is a stand-alone automobile. Our assumption right here in China is with the assist of the general public sector, we will set up, for instance, V2X platform that will assist, for instance, energy visitors lights, sooner or later, maybe parking tons and so forth, that will assist congested visitors, higher air air pollution, extra visitors security. On the similar time, leveraging that V2X infrastructure to, for instance, have linked built-in automobile and roll communication. In order that approach, our autonomous driving might be depending on the infrastructure that we’re serving to public sectors construct. So I feel that provides us a bonus. In order we’re making an attempt to develop our good transportation market, on the similar time, that set infrastructure for us to roll-out our autonomous driving and can make per car cheaper due to that skill to speak between rolling automobiles.

Dou ShenGovernment Vice President

James, that is Dou. Really, Robin has already talked about a couple of factors in regards to the imaginative and prescient — about this deal. I can add a couple of extra. So initially, now we have been doing this reside streaming enterprise on our platform for some time. And we do see that the speedy progress when it comes to each the consumer interactions and revenue-wise. So contemplating, YY has like 10 instances extra commerce than what now we have now. And on the consumer aspect, now we have like 100 instances greater than what YY has now. So this can be a nice match. Since now we have the demand from customers after which YY has the sturdy provide for the performers, I feel this can be a good match.

And secondly, Baidu, as a platform, quick movies, is changing into additionally an important media and customers come to eat the quick movies fairly largely. In order that aspect, the efficiency, they’ll create some movies after which distribute to our platform to draw extra followers, entice extra customers for the performers. We’ve got been doing this for the enterprise now we have performed and we see it’s fairly efficient. And what’s extra, reside streaming is a particular media — newest [Phonetic] media developed, it applies to many situations. So we already noticed the customers and the attorneys, they impart by means of reside streaming on our platform and in addition the docs and lots of different kinds of professionals. So reside streaming goes to be an important media by means of Baidu’s platform to assist the customers and in addition assist the professionals to attach them collectively.

Clearly, the operational expertise and in addition the reside streaming know-how from YY will considerably enhance up this expertise. And what’s extra, after I speak to the staff in YY and they’re fairly wanting to get the visitors from Baidu, particularly mining perception from the customers as a result of they’ve been engaged on this, have been instructing for visitors for a protracted whereas. Given what now we have on the consumer aspect, we’re fairly excited. In the mean time, the staff in Baidu, we’re additionally excited to get assist from YY’s staff due to their glorious operational expertise on the reside streaming, on the performers. So while you put all these issues collectively, I feel this might be an excellent one and we’re wanting ahead to it.

Herman YuChief Monetary Officer

Yeah. So simply let me summarize what Dou stated and what we had in ready remarks. I feel a number of issues to contemplate. Primary is, as we talked about on the decision earlier that that is an all-cash buy. So I feel as you guys know, now we have — Baidu Core has $20.Four billion on our books. To have the ability to use that, which we’re not seeing the worth being mirrored on our inventory, with the ability to purchase a property that’s producing quite a lot of money, I feel that will assist — that provides us the additional enhance in money.

After which from a synergy perspective, as Dou talked about, I feel simply having the ability — at the present time, it has been going to have a big content material community, particularly a content material community of creators. So Baidu already — we have already got quite a lot of expertise when it comes to writer accounts with Baijiahao and so forth. That provides us now higher administration and in a position to develop our general inventive community. So I feel that is very highly effective and it turns into a synergy, when you consider all of the choices that now we have at Baidu, the information feed that now we have, the quick video, now you may have reside stream. So I feel from a consumer perspective and in addition from an advertiser perspective, we will use these properties to assist them monetize it higher.

And as we additionally — Robin stated on the decision earlier that we hope to develop reside streaming past leisure. I feel everybody sees reside streaming as it’s at this time on the leisure aspect. However on Baidu’s platform, now we have content material throughout many, many alternative verticals. And what we hope is that by means of the data that we will purchase rapid to develop reside streaming to go throughout completely different verticals as a result of we predict that going ahead on content material on the Web, quite a lot of it will be wealthy media. So being able for brief video in addition to having reside streaming throughout completely different data data, that might be very vital.

And to that, I feel, finally, as consumer behaviors are educated to look at reside broadcasting on our platform, we then can use reside streaming as a approach for our advertisers to have the ability to join higher with customers and general improved conversion. That is why we imagine our early testing of data to social to buy, that cycle is engaged on Baidu’s property at this time. But when we might strengthen that social half, individuals to look at reside streaming and so forth, we will, sooner or later, use YY streaming as a software for advertisers to higher attain and handle the lifetime worth of our clients.

James LeeMizuho Securities — Analyst

Nice. Thanks a lot.

Dou ShenGovernment Vice President

Okay.

Operator

Your subsequent query comes from Gregory Zhao from Barclays. Please ask your query.

Xiaoguang Gregory ZhaoBarclays Funding Financial institution — Analyst

Hello, administration. Congratulations on the strong quarter. Thanks for taking my query. So first query is a really elementary query about your product design and the algo improvement. I feel it could be a comparatively previous query. I do know at the moment your feed product, the quick video are each based mostly on the advice algo to cater customers’ curiosity and hobbies. And I assume going ahead, your acquired YY streaming companies must also be some this sort of product and idea. As we all know beforehand, our search companies whereas many depend on customers to proactively strategy you for the search consequence. So is there any issue previously a number of years when your R&D staff modified the mindset from the search engine product to the advice framework?

So the second is a fast follow-up. Do you may have any visibility of the advertising income progress in 2021? Thanks.

Robin LiCo-Founder, Chairman and Chief Government Officer

I am going to simply take the primary one, Gregory. So information feed and search, really, they’re two completely different kind of merchandise, however they’re strongly linked. As, really, I discussed earlier than, on this kinds of calls, the customers, they’re — for the search customers, they arrive to Baidu proactively with sure job of their thoughts. So search itself is only a single level for his or her complete choice journey. So we will do far more to assist the customers obtain what they need. And whereas for information and feed, the customers are being fed passively. It is comparatively arduous for them to leap from passive behaviors to proactive behaviors when it comes to the consumer behaviors. So it’s comparatively simpler for search engineers. They modify their thoughts to develop their service to cowl extra consumer want. That is why you’ll be able to see the brand new pace progress previously few years is definitely fairly fast.

On different aspect, different gamers, while you swap from information feed to go looking, it is comparatively tougher really. For certain, the YY deal, so — which brings the reside streaming ecosystem and in addition know-how into Baidu will considerably enhance {our capability} to serve the consumer higher, not solely by means of feeds, but additionally by means of search. As a result of as I discussed earlier, as a result of reside streaming can also be changing into a reasonably good software to assist us to fulfill the customers’ want even within the search state of affairs.

Commenting on the second, advertising income outlook for 2021.

Herman YuChief Monetary Officer

The advertising income outlook for 2021. I feel proper now, as you may have seen, we have been reaching increased progress than sequentially for the final two quarters and we see that right into a fourth quarter. However I feel it is honest to say that, assuming that you’ve got COVID-19 proceed to be beneath management as we go into Q1, Q2, we should always see a fairly good half, first half of subsequent yr. So I feel proper now, we do not have a full visibility. What we do know is that while you take a look at the highest dozen or so industries that now we have, quite a lot of — half of them have turned optimistic and we predict that there’s extra legs to go because the financial system recovers. So I feel we’re at level the place as all these industries are rising sooner and a few of these which might be going unfavorable are turning round. We’re at level to profit from that turnaround. So we’ll see how this factor goes within the quarter and we’ll be capable of offer you an replace at our subsequent name.

Xiaoguang Gregory ZhaoBarclays Funding Financial institution — Analyst

Okay. Thanks very a lot.

Operator

Your subsequent query comes from Tian Hou from T.H. Capital. Please ask your query.

Tian X. HouTH. DATA. Capital, LLC — Analyst

Thanks, administration. Congratulations on quarter. I’ve two questions. One is said to Baidu Core search. So if we glance beneath the Baidu Core search, we see the administration web page, the income from that is rising actually quickly and virtually 100% year-on-year foundation. So one factor I do understand, the coronavirus, although they broken an excellent deal in China promoting market. Nonetheless, they’re actually pushing the enterprise from on-line to the cloud. So on-line is already previous tense. To the cloud, it is develop into a brand new factor. So Managed Web page is in that discipline or in that route. So I ponder sooner or later, beneath the Baidu Core, how a lot will come from Managed Web page? And the way a lot will come from conventional search? That’s how the corporate are planning to additional develop this Managed Web page. And I prefer it rather a lot. I really feel prefer it’s one — it is the full answer for retailers, for the corporate.

The second query is said to the YY. The reside streaming in China market has already reached the height. And definitely, YY, because the chief has quite a lot of uniqueness. Nonetheless, the growth-wise will not be that nice. So I ponder how Baidu goes to rejuvenize this distinctive YY to make it a lot larger than at this time’s YY, in order to make the most of the synergy between the 2. In order that’s the 2 questions. Thanks.

Dou ShenGovernment Vice President

Hello Tian, that is Dou. I am going to take the primary one and second one, and Robin will reply extra. So for the Managed Pages, it’s a part of the constructing blocks of the entire ecosystem. So within the very first starting, we hope Managed Pages can enhance that consumer expertise by filtering out the match data and all different potential unhealthy expertise for the customers. And in a while, we add an increasing number of capabilities to Managed Pages to assist the purchasers to handle their customers to do enterprise with their customers instantly over the Managed Pages. After which in a while, Managed Pages is changing into one vital part of the entire cloud service to assist the purchasers to do the [Indecipherable], the total cycle of their consumer life values. In order that then, clearly, we’re going to enhance the share of the Managed Pages as excessive as potential, as much as 100%, as a result of this can each profit the customers and the purchasers and our small enterprise homeowners.

So for the YY half, for certain, it’s a mature enterprise if we see the dimensions as of at this time. However really, we’re considering in a really completely different approach. We predict reside streaming is only a new begin for — as a brand new media tech. Particularly for Baidu [Indecipherable] has 300 million customers in Baidu actively daily. So we’re utilizing reside streaming as a really sturdy software or very efficient software to assist them to attach the customers and commerce and the professionals. I feel that is only a begin. So additionally, as we talked about, the penetration charge for the customers watching reside streaming in Baidu’s platform will not be excessive in any respect but. It is from being in the identical stage as different platform. In order that’s why we predict we will convert various customers at this time from tech and quick video customers to the listening customers will vastly raise the dimensions for the reside streaming.

Robin LiCo-Founder, Chairman and Chief Government Officer

Yeah. Let me simply reiterate the rationale for the YY acquisition. I feel a lot of you may have identified accurately, YY is the pioneer in reside streaming, however the progress charge have considerably slowed down previously couple of years. In case you discover that the bigger cell eco platforms all began reside streaming function or perform a lot later than YY, however they had been in a position to develop that enterprise a lot bigger. That mainly demonstrated that the reside streaming, as a stand alone, will not be going to have quite a lot of progress going ahead. However as part of a a lot bigger ecosystem, it simply matches naturally and might have quite a lot of synergy like Dou and I identified in the course of the earlier dialog.

Herman YuChief Monetary Officer

Yeah. And let me complement a couple of factors. Simply to make clear on hosted — on Managed Web page, what Dou talked about. When individuals purchase promoting for a Managed Web page, they nonetheless purchase search visitors. The distinction is that previously, they purchase search visitors and direct it to their very own web site, whereas the managed web page enterprise solely haven’t got to take care of the web site anymore, they’ll simply transfer the content material and companies on to managed web page by means of a wholesale advertising platform. And also you simply log in with an account after which while you purchase search visitors, it might add on that account. So subsequently, we’ll see what the customers do after the touchdown web page. And due to that, as a result of it is touchdown on our platform, we will leverage our AI to assist the retailers be capable of enhance their ROI and do lifetime worth administration.

And the second factor about what Robin talked about with reside streaming, I feel one is the synergy that now we have as a result of we’re a big platform. We’ve got an MAU of — simply Baidu App alone, now we have an MAU of 0.5 billion, after which now we have many different property. I feel that is one factor. The factor that now we have to look upon is whereas appears on the decision, quite a lot of your analysts suppose that YY is one thing that has been current for a few years. What we predict past three to 5 years, the place can we consider media goes? If you consider during the last 9 to 10 months with COVID-19, Zoom is among the extra well-liked merchandise which have simply skyrocketed. That is actually streaming, too. So all we’re saying is that we predict that having know-how in reside streaming, which certain is not leisure, Baidu have such sturdy verticals in all various things, we predict that the longer term is all going to be streaming. After which if we learn to do reside streaming, if we learn to handle creators of reside streaming and so forth and use it throughout completely different verticals and so forth, we predict it’ll flourish and make us even stronger inside phrases of data and data.

So I feel the short-term is making an attempt to get the upside from the synergy and the long-term is to leverage the know-how that the content material administration of the community suppliers and so forth, and to have simply wealthy media throughout completely different verticals on our platform. So I hope you guys perceive our technique is two-fold, not simply reside streaming as is with YY, however the potential that now we have reside streaming throughout our platform over a distinct kind of accessible content material.

Tian X. HouTH. DATA. Capital, LLC — Analyst

Okay, that’s nice. Thanks a lot for the solutions.

Operator

Your subsequent query comes from Elinor Leung from CLSA. Please ask your query.

Elinor LeungCLSA — Analyst

Hello, thanks very a lot. Congratulation on the strong quarter and thanks for the chance to ask questions. My first query is that, are you able to assist me — give us an replace concerning the restoration progress of every of the promoting verticals, which has been already returned positively year-on-year progress, which one remains to be unfavorable year-on-year? And what do you suppose the progress going ahead? And second is that once we combine with YY, is YY administration nonetheless keep or we’re going to change the administration with our personal staff? Thanks.

Herman YuChief Monetary Officer

So the query on {industry}, those that we see carried out nicely, turning from unfavorable to optimistic, as we talked about on the decision earlier is healthcare, it is training, it is auto, it is software program, it is life-style. So those who have carried out nicely. And the one which we predict that there was potential — there may very well be potential for doing nicely, it is going to be issues, along with those I discussed, issues like, for instance, actual property and some others. After which we proceed to see, for instance, e-commerce and retail that do nicely.

Robin LiCo-Founder, Chairman and Chief Government Officer

I met with the administration staff and some different members of YY staff. This is among the best groups I ever met really. So that they have excellent expertise for this complete reside streaming operations. They may keep intact for — to proceed to function this enterprise. In the mean time, we’re including extra sources and together with our staff members into this new staff to assist them higher discover the alternatives inside Baidu and to combine the service into Baidu’s platform. So in brief, this staff is nice, and they’ll keep as it’s.

Elinor LeungCLSA — Analyst

Thanks.

Operator

[Operator Closing Remarks]

Length: 70 minutes

Name individuals:

Juan LinHead of Investor Relations

Robin LiCo-Founder, Chairman and Chief Government Officer

Herman YuChief Monetary Officer

Dou ShenGovernment Vice President

Alicia YapCitigroup — Analyst

Eddie LeungFinancial institution of America Merrill Lynch — Analyst

Piyush MubayiGoldman Sachs Group, Inc. — Analyst

James LeeMizuho Securities — Analyst

Xiaoguang Gregory ZhaoBarclays Funding Financial institution — Analyst

Tian X. HouTH. DATA. Capital, LLC — Analyst

Elinor LeungCLSA — Analyst

Extra BIDU evaluation

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